Stocks tank after Ireland downgrade to junk

LauraMandaro

SAN FRANCISCO (MarketWatch) — U.S. stocks closed near their lows of the session Tuesday after Moody’s downgraded Ireland’s debt to junk status, erasing a small rally triggered by minutes of the Federal Reserve’s latest meeting.

The Dow Jones Industrial Average
DJIA, +0.08%
which had traded as high as 12,570.58 during the day, fell 58.88 points, or 0.5%, to close at a session low of 12,446.88, its lowest close since June 30.

U.S. stocks had made a brief spurt higher after minutes from the Federal Reserve’s latest meeting showed a minority of members supported providing extra stimulus to the economy.

Those gains fell apart in the last hour of trading after Moody’s Investor Service lowered Ireland’s foreign- and local-currency government bond ratings to Ba1, or junk grade, from Baa3. Moody’s said there was a “growing possibility” that after the current support program from the European Union and International Monetary Fund ends at year-end 2013, Ireland is likely to need further rounds of official financing before it returns to the private market. Read more on Moody’s downgrade of Ireland.

The Fed’s minutes from its June 21-22 Federal Open Market Committee meeting showing the central bank has largely solved how it plans to end its policy position of a target federal funds rate between 0% and 0.25%.

But members were at odds about the next step. Some said the Fed may have to turn to even more stimulative policies if the unemployment rate didn’t drop by much but inflation returns to relatively low levels. Read full report on Fed minutes.

“A lot of people are reading that as QE3” — or the third round of quantitative easing — “is on the table,” said James Dailey, chief investment officer at Team Financial Managers, in Harrisburg, Pa. “Personally I think that’s premature.”

Harvey Neiman, portfolio manager of the Neiman Large Cap Value Fund, thinks the Fed is adopting a “wait-and-see” attitude on the outcome of debt-ceiling and budget talks between President Obama and members of Congress before Aug. 2, when the government says it will no longer be able to pay its bills without raising the $14.3 trillion debt ceiling.

“We need some lasting solution,” said Neiman. “With the deadline looming, it’s hard for a rational person to be objective.”

The S&P 500 index
SPX, +0.04%
closed down 5.85 points, or 0.4%, at 1,313.64, within a point of session lows. Industrials and information technology led declines in the index’s 10 subsectors. The S&P 500 has approximately doubled from its March 2009 lows, helped by investors’ access to cheap borrowing after successive rounds of monetary stimulus from the Fed and other central banks.

The Nasdaq Composite
COMP, -0.23%
fell 20.71 points, or 0.7%, to close at 2,781.91.

Before the FOMC minutes, stocks had been fluctuating between minor gains and losses for most of Tuesday’s session, coming off a rocky Monday when soaring bond yields in Spain as well as Italy posed the risk that a potential default by Greece would create a mass exodus from other European countries’ debt. Read Monday's Market Snapshot.

“The market is beginning to realize that Italy is not Greece,” said Peter Cardillo, chief market economist at Avalon Partners. “There’s been too much exaggeration over Italy. The market wants to move higher.”

Late Monday, Eurogroup finance ministers said they would seek ways to prevent Greece’s sovereign-debt problems from spreading to the rest of Europe even if that meant lengthening the maturities of loans or lowering interest rates — measures that ratings agencies would consider to be a technical default. Read more on Eurogroup statement.

Cardillo said that ministers are trying to get the right deal together so markets begin to calm, and that a technical default on Greek debt may be the way out if that’s what stops contagion.

On the New York Stock Exchange, decliners outnumbered advancers slightly with 924.4 million shares trading hands by the close.

In other economic data, the Commerce Department reported the U.S. trade deficit in May surged 15.1%, largely due to the increased cost of oil imports. Read more on trade gap.

Shares of Dow component Alcoa Inc.
AA, -0.44%
moved down 1.3% after the aluminum producer reported financial results late Monday. Excluding charges, the aluminum producer’s second-quarter income from continuing operations was a penny short of expectations. Read more on Alcoa earnings.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.